Romania’s debt and budgetary deficit need a credible action plan

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu   Romania's current debt situation presents a concerning parallel to Greece during the early stages of the 2009-2012 sovereign debt crisis. There are important distinctions, like a much lower level of debt and the timing, as we are still early enough that fiscal decisive action would prevent blistering austerity measures leading to economic hardship. However, the current global debt environment is more challenging than it was 15 years ago.   Greece's fiscal crisis began with similar patterns of uncontrolled spending growth. The country's budget deficit exploded from manageable levels to over 15% of GDP in 2009. The debt to GDP ratio was at 115%, the second largest in the EU, after Italy’s 116%. The revelation of statistical irregularities and underreporting of deficits by previous governments created a combination of unsustainable fiscal position and credibility risk. Greece's sovereign debt crisis led to one of the most severe economic contractions in modern history. It all started with the unsustainable budgetary deficit.   While Romania is still far from that scenario, its budgetary deficit, which seems so difficult to curb, is creating concern as it can contribute to a steep rise in public debt. Romania’s public debt reached 56.3% of GDP by February 2025 and it is accompanied by one of the EU's largest fiscal deficits at 9.3% of GDP in 2024. While the debt levels remain significantly below Greece's crisis-era peaks, current projections suggest Romania's debt trajectory could reach 63% of GDP by 2026 under baseline scenarios, with potential increases to 70% of GDP by 2028 if insufficient fiscal correction occurs.   But there is a critical difference: the timing. Romania has the opportunity to implement corrective measures and maintain growth before reaching unsustainable debt levels. The Greek experience serves as a stark warning that early, decisive fiscal action is essential to prevent a much more severe adjustment process later.   However, the global situation today is more complex than it was 15 years ago. Pandemic deficits led to an unprecedented surge in global debt to over $323 trillion in 2024 has fundamentally transformed the investment landscape, creating complex challenges and opportunities that are reshaping portfolio strategies worldwide.   This debt represents approximately 326% of global GDP and is not merely a statistical concern. It is a systemic force that is redefining how investors approach risk, return, and asset allocation across all markets. In addition, post-pandemic inflation led to a rise in interest rates, and the debt is difficult to manage even for mature economies like the US or UK, with interest payments eating up ever larger chunks of the national budgets.   Investors are witnessing a fundamental shift where positive economic news is overshadowed by mounting concerns about fiscal sustainability. The erosion of sovereign creditworthiness represents perhaps the most profound challenge facing investors today. In the G20 group of developed economies, the largest debt-to-GDP ratio belongs to Japan, 235%, followed by Singapore (173%). Italy (135%) and the United States (124%). In Europe, the country with the largest debt-to-GDP ratio is Greece (154%) followed by Italy (135%) and France (113%).   The Euro Area is at 87%. Germany is at 63%. Out of the Eastern European countries in the EU, Hungary is at 73%, Slovenia at 67%, Slovakia at 59%, and Croatia at 58%. Poland is similar to Romania at 55%, but with a smaller budgetary deficit. Compared to these, Romania’s debt is not at a very high level; our main problem, however, is the budget deficit, which is the highest in the EU, and the country's credit rating.   Standard & Poor's and Fitch credit ratings for Romania stand at BBB- with a negative outlook. Moody's credit rating was last set at Baa3, also with a negative outlook. This means Romania is just one fragile level above the “junk” category, where investment is not recommended. And all three agencies recommended budgetary deficit reduction and warned about implementation challenges without decisive and credible fiscal measures.   Globally, investors are pursuing a pronounced "flight to quality" across asset classes, seeking high-grade assets with strong fundamentals and reduced leverage exposure. This is another reason why maintaining the country's debt rating and avoiding falling into the “junk” category is getting very important. In that hypothetical case, the new government might have difficulties in finding lenders willing to buy its debt, and, possibly, at much higher interest rates than today, putting additional pressures on the budget as more money would be spent on debt service and refinancing.   This is why, beyond avoiding the possible loss of EU funding, the future government of Romania should tackle the deficit and debt challenges by coming up with governmental and fiscal reforms, a credible plan and a realistic implementation strategy. Only political declarations about cutting wasteful spending will not be sufficient, as markets have learned to be skeptical of such promises, especially given a track record that shows an inability of recent governments to carry out cost-cutting reforms.